NEW DELHI: Morgan Stanley upgraded Indian equities to 'equalweight', in a recent report titled 'Asia/GEMs strategy', after being 'underweight' since the first quarter of 2011.

According to the global investment bank, Indian markets are now trading at a price-to-book multiple of 2.1x, close to the trough valuations of 2.0x in the 2002 and 2008 cycles. The investment bank has a Sensex target of 19,954, representing an 18 percent upside from the current levels.

Indian stocks tend to perform well versus MSCI emerging market indexes after a period of oil price declines despite the poor topdown domestic macroenvironment, the report said.

The Morgan Stanley India Strategy team remains focused on stock picking. It prefers mid caps and small caps over large caps.

Technology and consumer discretionary are its preferred sectors and it continues to avoid state-owned banks. At the stock level, large cap top picks include Maruti, Infosys and ICICI Bank. Among mid caps, it prefers Dish TV, Tata Motors, DVR and Mindtree.

"The Indian equity market has been through a pronounced period of underperformance weighed down by persistent downward revisions to GDP growth expectations, negative revisions to earnings expectations and more recently significant currency weakness have taken a heavy toll on absolute and relative performance.

This is an indicator of the extent to which the India market is already pricing in the adverse global environment and the current domestic situation of high inflation and slower trend GDP growth," it added.

External borrowing has become costlier for India Inc. after the depreciation of the rupee against the dollar, it noted. The currency has fallen over 20 percent in the past 12 months.

Morgan Stanley is of the view that external funding vulnerability during a period of dollar strength and European banks deleveraging is a key concern.

The global investment bank is confident of Indian corporates "which have attractive business models facing both global and internal demand".

This upgrade comes after Deutsche Bank and JPMorgan upgraded Indian stocks to 'overweight' from 'neutral'.

Last week JPMorgan upgraded Indian equities, despite acknowledging the risk factors facing the economy, encouraged by what it called a number of more positive factors, including historic valuations.

The bank said its year-end target for the BSE index was 19,000 points, a nearly 12 percent upside from current levels.

Deutsche Bank upgraded Indian stocks saying the market is close to its cheapest in two decades from an EBITDA and sales perspective. Deutsche Bank's India strategists have an end-year target for the Sensex of 18,000 points.

"Echoing similar sentiment, Standard Chartered said it sees an upside in some Indian stocks in which bad news has had a 'disproportionate impact,'" Reuters reported.

The bank's top picks, which it identifies as potential gainers, include cement makers ACC and Ambuja Cements as well as mobile operators Bharti Airtel and Idea Cellular. While among gas utilities, it is betting on Petronet LNG and GAIL, IRB Infrastructure and Apollo Tyres are the top picks in their respective sectors.